Industry cycles play a role in corporate stumbles

By Jo Whitehead *

(exechange) — December 1, 2019 — In our research into 10 years of corporate stumbles (in which the CEO leaves under a cloud after a significant drop in share price), the majority of stumbles occur due to the mismanagement of an avoidable, optional growth strategy.

In many of these cases, the nail in the coffin was a turn in the industry cycle.

Such turns accounted for stumblers in the financial crisis and commodity and oil and gas markets, and companies such as BT and Standard Chartered being caught in other cyclical crashes.

What caused the CEO to be forced out was less the price decline, but rather the weaknesses in competitive position and capabilities that a price decline revealed.

Expansions into adjacent markets rarely lead quickly to strong competitive positions or experienced management teams.

If, in addition, M&A was used to enter the markets, then the high price of entry had to be written off, further punishing shareholders.

These companies felt a pressure to expand due to constraints in their core or attractive margins in adjacent markets.

But, without a leading position, they all stumbled when the cycle turned against them.

* The writer is a director of the Ashridge Strategic Management Centre at Hult International Business School and is currently researching why companies and CEOs stumble.

Editor’s note: This is a guest post.